AQA Economics A Level - Microeconomics Key Terms

Vocabulary flashcards covering key terms and definitions for AQA A-Level Microeconomics.

Behavioural Economics

Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Ceteris Paribus

To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus – i.e. all other influencing factors are held constant.

Normative Statements

Normative statements express an opinion about what ought to be. They are subjective statements that carry value judgments.

Positive Statement

Objective statements that can be tested or rejected by referring to the available evidence.

Basic Economic Problem

There are infinite wants but finite factor resources with which to satisfy them.

Opportunity Cost

The cost of any choice in terms of the next best alternative foregone.

Factors of Production

Inputs available to supply goods and services: Land, Labour, Capital, Enterprise, and Know-how.

Allocative Efficiency

Occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production.

Production Possibility Frontier

A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently.

Pareto Efficiency

In neoclassical economics, an action done in an economy that harms no one and helps at least one person, or a situation where the only way to make one person better off is to make another person worse off.

Bounded Rationality

The idea that the cognitive, decision-making capacity of humans cannot be fully rational because of limits such as information failure, time limits, human brain processing limits, and the impact of emotions.

Choice Architecture

The framing of a choice or design of the environment in which someone must make a decision in order to influence or manipulate the outcome.

Nudge

A technique used by choice architects in order to change someone's behaviour in an easy and low-cost way, without reducing the number of choices available ("non-enforced compliance").

Asymmetric Information

Where parties have unequal access to information in a market.

Law of Demand

The law of demand states that there is an inverse relationship between the price of a good and demand; as prices fall, demand expands, and if prices rise, demand contracts.

Cross Price Elasticity of Demand

Responsiveness of demand for good X following a change in the price of good Y (a related good).

Price Elasticity of Demand

Measures the responsiveness or sensitivity of demand for a product following a change in its own price.

Income Elasticity of Demand

Measures the relationship between a change in quantity demanded and a change in real income, calculated as the percentage change in quantity demanded divided by the percentage change in income.

Price Elasticity of Supply

Price elasticity of supply (PES) measures the relationship between a change in quantity supplied and a change in market price.

Law of Diminishing Returns

States that employing an additional factor of production will eventually cause a relatively smaller increase in output in the short run when at least one factor of production is fixed.

Average Total Cost

Total cost per unit of output, calculated as $\text{Average Total Cost} = \frac{TC}{Q}$.

Economies of Scale

Falling long run average cost as output increases in the long run.

Profit Maximisation

Profit maximization occurs when marginal cost equals marginal revenue ($MC = MR$).

Creative Destruction

Refers to the dynamic effects of innovation in markets where new products or business models lead to a reallocation of resources, threatening established businesses while creating new jobs.

Barriers to Entry

Factors which make it difficult or expensive for new firms to enter a market to compete with existing suppliers.

Perfect Competition

A market with many competing firms and no entry barriers where each product is homogenous and where no single firm has any control over the market price.

Oligopoly

A market dominated by a few large suppliers where market concentration is high and firms exhibit mutual interdependence.

Price Discrimination

When a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs of supply.

Contestable Market

A market where an entrant has access to all production techniques available to incumbents, is not prohibited from wooing customers, and entry decisions can be reversed without cost.

Marginal Revenue Product of Labour

The extra revenue generated when an additional worker is employed, calculated using the formula $MRPL = \text{marginal product of labour} \times \text{marginal revenue}$.

Monopsony Employer

A labour market structure in which there is a single powerful buyer of a particular type of labour, which tends to pay lower wages and employ fewer people than a competitive market.

Trade Union

An organised group of employees who work together to represent and protect the rights of workers, usually by using collective bargaining techniques.

Gini Coefficient

Measures the extent to which the distribution of income or consumption among individuals or households deviates from a perfectly equal distribution, ranging from $0$ (perfect equality) to $1$ (complete inequality).

Lorenz Curve

Shows the degree of income or wealth inequality in a given economy or population relative to the line of absolute equality ($45^\text{o}$ line).

Absolute Poverty

Applies to people who do not have adequate nutritional intake per day, or do not have adequate shelter or clothing in order to survive, defined by the World Bank as living on less than $\text{USD } 1.90$ a day adjusted for purchasing power parity.

Market Failure

Exists when the competitive outcome of markets is not efficient from the point of view of the economy as a whole.

Public Goods

Pure public goods are non-rival (consumption by one person does not reduce availability for others) and non-excludable (non-payers cannot be prevented from consuming them).

Externalities

Third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.

Government Failure

Policies or government interventions that cause a deeper market failure or produce new and more serious problems.

Moral Judgement

Decisions that evaluate situations, courses of action and behaviour that are based on intuition, feelings and emotions.